Executives face a daunting dual challenge every day. On the one hand, there is the need to manage the business through both steady-state operations and times of disruption. On the other, they must create value for shareholders through financial excellence and growth. During the Covid-19 pandemic, both these challenges became even more urgent.
Digitalisation. Photo: Pixabay. Licence: CC0
Photo: Pixabay. Licence: CC0
As a result, many executives turned to digital solutions to adapt and even find new operational opportunities for their organisations. Yet while many of these opportunities were made possible by digital transformation, linking them to delivering financial excellence has traditionally been difficult.
Now, new research shows the correlation between investing in digital transformation and delivering financial success. An academically rigorous, statistically significant analysis was conducted by Professor Morgan Swink, the James L. And Eunice West Chair, Supply Chain Management, and Executive Director, Center for Supply Chain Innovation, at Texas Christian University’s Neely School of Business. Using public, quarterly financial statements for 48 publicly-held, North American companies that use Kinaxis for their supply chain planning, Professor Swink voluntarily and independently conducted what is known as a “difference in differences” analysis spanning all of 2019 and the first three quarters of 2020.
These 48 organisations represented those who have already begun their digital transformation against industry averages over the corresponding period. Furthermore, the analysis was performed as a pre/post-event comparison based upon the declaration of Covid-19 as a global pandemic in Q1 2020.
In 2019, prior to the beginning of the pandemic, the financial performance of these 48 businesses outpaced industry averages on key metrics, including return on assets, return on sales, return on invested capital and asset turnover. Throughout the pandemic in Q1-Q3 2020, these businesses extended their leading positions, which, in turn, has increased the gap between their performance and industry averages by as much as 2.5x. It is a clear testament to how a strong focus on digital transformation can translate into positive financial metrics and long-term business success.
Impact of the pandemic on profitability metrics
When directly comparing against industry averages, these 48 businesses demonstrated financial improvements across all metrics, even as industry averages showed performance declines in many measures. This holds true for profitability measures and costs. For example, while asset turnover declined across the board, these businesses were able to limit the negative impact better than their industry peers.
Revenue and stock price, two of the most important metrics for every executive at a publicly-held company, were also better among the subset of 48 organisations. During the pandemic, these businesses experienced revenue increases while industry average revenues declined. They also saw their stock price increase by three times more than the industry average.
The opportunity
The results of the analysis highlight a significant opportunity for supply chains, which have historically struggled with linking operational capabilities and digital transformation into financial success. In both cases, the benefits are typically stated in terminology related to tactical improvements, as opposed to the metrics most important to executives responsible for investment decisions. As Professor Swink stated: “you need to learn what those metrics are and be able to position the proposal in that language just like the other businesses competing for those funds.”
Claire Rychlewski, Senior Vice President EMEA at Kinaxis.
The author, Claire Rychlewski, is Senior Vice President EMEA at Kinaxis.
Once the metrics are identified, operational capabilities can be understood as corresponding input drivers. For example, increased visibility is highly desirable so that supply chains can sense disruptions as they occur and respond immediately. This tremendous benefit can be tied to financial outcomes such as reduced inventory and cash buffers, improved capacity utilisation and lower cost resolution of demand-supply mismatches.
Going further, improved return on invested capital and improved return on assets can be tracked because digitally-enabled operational capabilities are now linked to these financial performance measures. By doing so, it aligns the reasons an investment is needed with its value to the decision-maker.
This creates a pivot point for supply chains, as Professor Swink suggests that practitioners must be able “to relate structural choices, policies, technology investments, and training and labour investments to the kinds of KPIs that show up on income statements and balance sheets.” This is crucial because, “if we really want to speak the language of the CFO, we must think beyond those kinds of specific operational metrics to think about how our choices affect these larger outcomes.”
- The author, Claire Rychlewski, is Senior Vice President EMEA at Kinaxis.
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